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(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

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Major drug companies are lobbying Congress to reduce the $4 billion increase in costs due to raising the discount for seniors purchasing drugs at the ‘donut hole’ level in Medicare Part D to 70 % from 50 %. The provisions for an increase in the discount was included in a spending bill passed by Congress last February.

Pharma companies and major corporations with billions of dollars stashed overseas said that if tax rates were cut on dollars transferred to the U.S they would raise wages, increase R & D spending and reduce prices. Most companies did not deliver on their promises or benefits to patients either. Instead, they increased the size of their stock buybacks by 4 to 5 times in the case of the largest stock buyback company, Amgen.

Sources: SEC, The Wall Street Journal – 12/6/18

Only two of the top ten companies actually reduced share buy
backs since January of this year.
Corporations overall are expected to complete over $1 trillion of stock
buy backs by December 31st Goldman Sachs estimates.

Over a dozen Democratic members of the House ofRepresentatives sent letters to five top pharma companies with data showing new increases in drug prices while increasing share buy backs. The drug industry responded that they were reducing prices, increasing R & D spending and raising employee wages. Merck, CEO, Kenneth Frazier said in a reply, “We view the legislation (tax cut) as providing us with more flexibility to deploy capital in support of our strategy to invent new medicines that address key unmet medical needs, ultimately benefiting patients.” The reality is that prices for the most popular drugs are still going up.

AbbVie raised the price of Humira by 9.7 % in January the Democrats pointed out in their letter to the firm. Inflation for this past year is 2.4 % that drug increase is nearly 4 times the rate of overall consumer price increases in the U.S. economy. AbbVie sent a reply to the Congressmen outlining many programs using their tax cut funds including: a $1000 salary increase to non-executive employees, plans to invest $2.5 billion in capital projects in the U.S. over the next five years, $100 million healthcare and housing for people in Puerto Rico, an $100 million to the Ronald McDonald House to fund lodging for pediatric cancer patients and their families.

Next Steps:

Drug costs hit seniors particularly hard because they need the medication, and they are on fixed incomes. Drug companies have to do better by ending what the SEC called, “stock price manipulation”, before the Safe Harbor policy in 1982 allowed stock buybacks. Billions of dollars are wasted to goose the price of stocks to benefit executives and big investors. Investors are misled by earnings reports using fewer stock shares to compute earnings per share, often used to assess company performance. Patients are hurt by price increases, Humira costs patients $50,000 per year for the standard treatment if they have no insurance coverage. Stock buybacks by pharma companies must stop, the price gouging of patients and insurers needs to end.

Another economy that drug companies should adopt is to end direct-to-consumer advertising of prescription drugs. Over 150 countries do not allow prescription drug advertising, only the U.S. and New Zealand allow advertising directly to patients to create “pull” sales from patients requesting a drug from their doctor. According to Kantar media, drug manufacturers spent $6 billion on direct to consumer television advertising in 2017, a 64 % jump from 2012. The billions being spent on DTC advertising are better spent on reducing drug prices. We applaud the moves by AbbVie in raising employee salaries, donations to Puerto Rico and Ronald McDonald house, these are excellent steps. Many drug firms have foundations that offer patients with low incomes a way to obtain their medicines for free or little cost. The difficult aspect of most of these drug-for-free programs is they require large volumes of paper work, with major time delays when the patient needs to the drug immediately. Drug company executives need to see the light on what is happening, the price gravy train and waste of stock buyback funds gleaned from patients needs to end. Why wait for legislation? We appeal to CEOs – make the right moves now. See that taking responsibility for solving the cost crisis you have created will be far better for your firm, patients and insurers. You may get a solution you don’t want if you wait for Congress to pass legislation.

With the passing of Senator John McCain, it is a good time to reflect on our leaders who understand, believe and create the Common Good by their actions. Senator McCain was certainly such leader in the two major areas: campaign finance reform and his deciding vote to keep Obamacare (‘policy should be decided in good order’). The way he loved this country and reached out to members of both sides of the isle in Congress is an example we could all hope to emulate in focusing on the Common Good above all else. In a fitting tribute we publish the letter he asked to be read after this passing:

“My fellow Americans, whom I have gratefully served for sixty years, and especially my fellow Arizonans,

“Thank you for the privilege of serving you and for the rewarding life that service in uniform and in public office has allowed me to lead. I have tried to serve our country honorably. I have made mistakes, but I hope my love for America will be weighed favorably against them.

“I have often observed that I am the luckiest person on earth. I feel that way even now as I prepare for the end of my life. I have loved my life, all of it. I have had experiences, adventures and friendships enough for ten satisfying lives, and I am so thankful. Like most people, I have regrets. But I would not trade a day of my life, in good or bad times, for the best day of anyone else’s.

“I owe that satisfaction to the love of my family. No man ever had a more loving wife or children he was prouder of than I am of mine. And I owe it to America. To be connected to America’s causes – liberty, equal justice, respect for the dignity of all people – brings happiness more sublime than life’s fleeting pleasures. Our identities and sense of worth are not circumscribed but enlarged by serving good causes bigger than ourselves.

“‘Fellow Americans’ – that association has meant more to me than any other. I lived and died a proud American. We are citizens of the world’s greatest republic, a nation of ideals, not blood and soil. We are blessed and are a blessing to humanity when we uphold and advance those ideals at home and in the world. We have helped liberate more people from tyranny and poverty than ever before in history. We have acquired great wealth and power in the process.

“We weaken our greatness when we confuse our patriotism with tribal rivalries that have sown resentment and hatred and violence in all the corners of the globe. We weaken it when we hide behind walls, rather than tear them down, when we doubt the power of our ideals, rather than trust them to be the great force for change they have always been.

“We are three-hundred-and-twenty-five million opinionated, vociferous individuals. We argue and compete and sometimes even vilify each other in our raucous public debates. But we have always had so much more in common with each other than in disagreement. If only we remember that and give each other the benefit of the presumption that we all love our country we will get through these challenging times. We will come through them stronger than before. We always do.

“Ten years ago, I had the privilege to concede defeat in the election for president. I want to end my farewell to you with the heartfelt faith in Americans that I felt so powerfully that evening.

“I feel it powerfully still.’

“Do not despair of our present difficulties but believe always in the promise and greatness of America, because nothing is inevitable here. Americans never quit. We never surrender. We never hide from history. We make history.

There are 3.5 million direct health care workers in the workforce today. The Bureau of Labor Statistics estimates that another 1 million direct health care workers will be hired by 2024. Direct healthcare workers include mostly all the assistant positions except a registered nurse: personal care workers, home health aides, and nursing assistants.

Sources: Bureau of Labor Statistics, Vox – 7/3/2017

Direct care workers often receive a wage below $15.00@hr. About 90 % of personal assistants receive $30,000 or less per year in income. One reason wages are so low is that 70 % of all long term care costs are paid by Medicare and Medicaid. These agencies reimburse care providers on a fixed cost basis. There is another reason. A high number of administrators are being hired rather than physicians, nurses or direct care workers.

When viewed from the perspective of healthcare spending per capita, administrator hiring was about 650 % more than overall per capita services. Healthcare is a lucrative sector for business, so they focus on hiring more administrators and managers rather than nurses and direct care workers. Healthcare providers can take the wages they pay too many administrators and give caregivers the wages they need to take are of themselves and their families. The byzantine way the healthcare industry is structured with insurance companies between the providers and workers when we only need one government agency to manage insurance is a good example. Most providers have who departments devoted to interacting with insurers and Medicare staff, which expensive to staff with specialized expertise due the idiosyncrasies of insurance policies.

Next Steps:

We clearly need to use computer systems and software to reduce the number of administrators and overhead in the system to the norm of per capita costs. End the use of private insurers except as contractors to a single government agency, use a standard reimbursement procedure with no middle layers of pharmacy benefit managers and end go to middle managers for insurance companies.

“The core need is to provide low cost effective health insurance for all people (like all developed countries do), so when illness strikes patients receive high quality care and become healthy again. Why do we need multiple insurance payers – private and the federal government? If we were running a corporation we would not have two accounts payable departments? We need to transition to individual health accounts that stay with the patient regardless of employment status beginning at birth. Here are ideas on how this transition could work.

Complete Analysis of ACA – We need to learn from the public exchanges that work – California’s public exchange has been quite successful covering new patients, and keeping costs reasonable for low income patients. Yet, we also need to look at why those exchanges like Oregon are not working well and expensive. Let’s summarize the analysis and publish the results so we can build a consensus around the solution, extending what works and recommendations for changes.

Priority One Cover the 9 Million Uninsured – those not covered by insurance need insurance now, we need to figure out how to cover 100 % of our citizens immediately. Offering a public option on the exchanges for basic health services and drug coverage would be a good start.

End State by State Coverage – state pools not large enough to make insurance work for all. With 360 million people in the US we can make our health insurance pool work to reduce costs. Plus, legislation needs to be passed to reverse the Supreme Court decision to allow states to opt out of subsidies. For example, Texas opted out on $10 billion subsidies leaving many low income families without insurance or very high premiums they cannot afford. Interestingly, a few months ago I talked with a small business office manager in Texas, she complained that ACA was not working (her firm did not offer health insurance), for her hourly staff. Obviously, one reason is that Texas opted out of the subsidy program. Using a national pool would help to spread out the disparities between regions in terms of the rising cost of insurance versus stagnant wage increases.

Create Individual Health Accounts – funding can be setup via a payroll tax, accrued to a personal national health insurance account when working (if they don’t have employer options – to be transitioned later). For individuals or families below the regional poverty level they would pay no health payroll tax. For those individuals who are not contributing to their health account, the federal government would fund a basic health and drug account by progressive taxes on wealthy individuals over $250k and the increase taxes on corporate profits. Corporations can offset the increased tax, by offering lower cost insurance, medigap plans or encouraging their employees to move to the basic national health insurance program.

End COBRA – by setting up health accounts regardless of being employed, there is no need for COBRA plans. Otherwise, for those unemployed to continue coverage often they have to pay soaring COBRA premiums up to 400 % of their employed premium rate. For this author, two major illnesses occurred when I was unemployed, often with the stress of being unemployed is the time we need health insurance. COBRA is another example where health insurers are charging outrageous rates to those who need the insurance badly but can least afford it. For the unemployed they could rely on basic health coverage in their individual health account.

Transition Employer Plans – convert employer plans over 4 years into a national personal health care account. Rollovers can be accomplished in a similar way to 401K to IRA rollovers (without the penalty for early withdrawal). Ending employer programs will cut a layer of administration in benefits departments that more rightly belongs to the individual regardless of employment status.

End Penalties For No Insurance – we want to to tax behavior we don’t want and support or subsidize behavior we do want. All Americans who have Social Security numbers should be able to enroll in a personal health insurance account, if they do not have a employer sponsored program. Parents can apply for a SSN for their child to be covered. A public insurance option should be offered to all those families not in employer sponsored programs. The public option run by Medicare is a basic health insurance program run similar to basic Medicare for seniors with medigap plans to cover the other 80 % of coverage needed.

Use the Medicare Drug Formulary – we don’t need multiple formularies and tiers of drug coverage. Medicare already provides one formulary which should be used as the industry formulary. We need to empower Medicare to negotiate all drug prices and health procedures with providers with provision for regional differences on procedures. A critical medication list can be created by Medicare for life threatening (Epipens) or serious chronic conditions (diabetes) capped at 5% profit for drug manufacturers.

End Stock Buybacks by Insurers – insurers need to end stock manipulation and the waste of stock buybacks. Companies like Aetna have spent billions of dollars on stock buybacks which would go a long way to reducing premiums and costs to patients.

Pricing needs to be transparent – similar to a mortgage disclosure statement. The explanation of benefits and drug claim form needs to be clear about the provider or drug price, any discounts and rebates, the price the insurer is paying, the price the provider is actually requiring, the price the pharmacy is paying and the exact out of pocket cost to the patient, with patient accruals in out of pocket and co pays toward insurance coverage.

Do it Without Waiting – let’s get progressive investors to back drug manufacturers that adhere to drug cost reasonable, critical med list, transparent pricing innovative insurance, publicize get more investors on board. Work with Wall Street to setup an ETF stock to focus on companies adhering to the progressive national health programs demonstrating good returns.

Awareness of What Works – A media campaign with surrogates, leadership in Congress, interest groups like the AMA, and the insurers to bring the American people along on the solution journey and to put pressure on Congress to pass the necessary legislation.

Health insurers would focus on medigap plans, taking risk out of innovative drugs to help speed them to market, vision and integrative medicine, personalized medicine, telemedicine – taking their layer out with reduce costs dramatically. They can be contractors to Medicare for transition to health accts. Or insurers can be contract administrators to Medicare, keeping costs low and utilizing their expertise.

Lets establish a lifetime health insurance program that provides good quality care, and low cost medications for all Americans.”

As we have noted in past posts, worker wage increases have been stagnant for decades and most recently for the 80 % working class since the last recession while 90 % of income increases have gone to the top 10 %.

The Department of Labor announced last week that inflation has completely wiped away any worker wage increases from July 2017 to July 2018.

Inflation went up during the 12 month period by 2.9 % while wages were up only 2.7 %. Since the Great Recession workers have not left out of the economic recovery. In 2000, the share of corporate sector income going to workers was 82 % now it has slipped to 77 %. The benefits of the Tax Cut, which were supposed to raise worker wages has mostly gone to stock buy backs raising the compensation for executives by juicing the price of their stock holdings. Goldman Sachs estimates that nearly $1 trillion will be spent this year on stock buy backs, and many analysts believe that stock buy backs are holding the U.S. stock markets up in the midst of a worldwide decline in share prices. Stock buybacks mean that necessary capital expenditures in productivity programs, innovation and new plant and equipment are forgone. Economists note that investments in key long term projects are crucial to increasing productivity which has been at an all-time low of 1.7 % over the past ten years. Increased productivity will support raising wages without increasing costs.

Next steps:

Let’s start with the fundamental reason employees do not receive raises beyond inflation – management has no incentive to raise wages. Wages are accounted for as a cost in the books of the company, executives receive major bonuses to increase profits not costs.

The next major factor is automation. Automation of jobs, and work process activities increases profits reduces salaries, benefits and is easier to manage than staff. Automation has continued to give management the upper hand in any wage negotiation. Most job losses over the past ten years have been due to automation. As robots and computer software become more sophisticated with artificial intelligence even more jobs will be lost. For example, while Amazon announces hiring 100,000 workers over the next ten years, at the same time they are installing 40,000 robots to permanently perform many of the those jobs.

Other factors play a major role, corporate mergers reducing the number of companies in major industries, there are 50 % fewer public companies on the stock exchanges than ten years ago. The gig economy employs almost 33 % of all workers, contracting is cheaper and companies can contain costs with flat fixed based contracts with no benefits. Executive pay is 300 % of the average worker pay, so there is less money to go around for raises. Workers have lost union representation over the past 50 years when 33 % of all workers were in unions in 2015 only 10 % were represented. Finally, job market automation, the Internet has provided employers with a vastly larger pool of candidates which they can play off each other. Sites like LinkedIn were designed for corporate recruiters to look at candidates – not with the needs of candidates in mind. We examine all these factors in more depth in our blog: Wages Are Stuck, Here’s Why and What to Do About It. Here is a summary of our recommendations:

The Action:

Place Workers on Boards– as Germany has so effectively setup, engaging management with required representation of workers on Boards.

End Outsourcing– corporations would pay 50 % tax on each job moved overseas making the move costly, encouraging corporations to move jobs to low cost or inland areas of the US, or innovation economic zones (special tax geographies) and to invest in worker training to receive training tax credits.

End Low Cost H1-B Visas– the practice of importing inexpensive labor to drive down wages in US markets would be ended.

Offer Lower Taxes on Repatriated Funds– only if the profits from overseas are invested in productivity actions, increasing wages of workers (not executives), reducing costs or innovation. Stock buybacks or dividends would be prohibited.

End Stock buybacks– these funds are totally wasted, mislead investors on earnings reports and only serve to increase compensation for executives and shareholders. These funds are better allocated to increase worker wages or increase productivity so workers can receive higher wage increases.

Balance Job Market Process– require companies over 100 employees to offer information on their website for contacts, phone numbers, job listings with identified contacts, and to let the candidate know the status of his consideration, and candidate introductions held monthly for F2F communication.

Balance Worker and Executive Pay– tax corporations 25 % surcharge on any corporate income where any executive makes greater than 150 % than any the average worker wage – this would force executives to share their income with workers while not increasing costs. End federal tax deductions on corporate income taxes for executive stock compensation above $1 million. End golden parachute packages by taxing 50 % of every dollar received above $1 million. Severance packages for workers would have to be in proportion to the highest executive package ie, executive receives 10x of monthly salary a worker would receive 10x of his/her monthly salary.

Fund Worker Training and Increase Wages – for each robot employed, the corporation would be required to offer training, skills development for the displaced worker to find a comparable job within the company or outside. Where automation software or technology is deployed 10 % of the realized cost benefit would be used to raise the wages of all workers in the company.